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1.1: The Success of a Firm Lies in its Ability to Have Clear Property Rights

  • Page ID
    4245
  • A property right is a legally enforced right to select the uses of an economic good produced by a firm. Private property rights are those assigned to an individual person, while an alienable property right is one that can be given or transferred to someone else. For example, the government employs a police force and legal system to enforce these rights. Ownership of the property right includes the use of that right and its alienability or ability to give or transfer that right. These rights are separated such that, for example, a person can rent an apartment but cannot sell the apartment.

    Market economies have the ability to be highly efficient in organizing economic activity if the property rights are clearly known and assignable to individuals, and if the contracting costs such as search and information costs, bargaining and decision costs, and drafting, policing, and enforcement costs are known. Specific knowledge is important in decision-making, and individuals make more productive decisions when property rights are known and assignable. Firms exist because there are contracting costs to using markets, and these costs may be lower when done by firms.

    This is easy to understand in a business such as a proprietorship, where one person makes all decisions and signs all contracts. But it is more complex in a firm such as a cooperative or mutual. A considerable amount of research suggests that firms are actually a connection of a group of contracts. The firm signs contracts with 1) suppliers to purchase inputs to create something, 2) employees to help provide services with their labor, 3) lenders, bondholders, preferred stockholders, or others who provide capital to the firm, 4) buyers who agree to purchase the products or services made by the firms, or 5) any other entity doing some form of business with the firm.

    In a cooperative, however, some of these contracts exist with owners and employees of the firm. In a consumer cooperative, the goods and services provided by the cooperative are consumed by the members, while in a producer cooperative the cooperative markets products supplied by the members. Cooperatives are successful if they are able to make something for their members either through purchasing supplies or providing inputs rather than having members do this in the market as individuals with no ownership. This Make or Buy decision has been widely studied within the context of the contractual arrangements that make up a firm. The concepts of ownership, property rights, and purpose of a firm are key to understanding the unique nature of a cooperative.